Fast Food Industry of America - Assignment Example

Fast Food Industry of America PEST Analysis A PEST (Political, Economic, Society, and Technology) analysis is a vital macro-economic study of the diverse aspects that affect the locality a company or business is operating. These factors encompass internal aspects like personnel, workplace apparatus, IT, remuneration and funding among others; and the external factors including contractors, representatives, and competing companies among others. The PEST analysis also considers other external factors that have some imperceptible consequence on the company or industry. These include: political, legislative regulations, fiscal, social-cultural, and technical factors. Political Analysis Although not usually detected by business actors, political considerations are very crucial to the business environment. Within the fast food industry, most regions and territories have very favourable political settings thus encouraging exceptional fiscal policies which lead to greater growth patterns for the industry. In many of the prominent trading zones for the fast food industry, including the United States, Europe, and Australia plus the newly emerging economies, wide-ranging macroeconomic structures have been set up which make an excellent environment for both domestic and international commercial activities (IMF, 2009). To compliment this, the viable trading regions have no perceptible political crisis, social upheavals, and other machinations that upset the business community. State policies on commercial activities have been construed to assist the business community. Within the United States, both state and federal statues in various macroeconomic policies have ensured a strong stability that has enhanced the fast food industry has blossomed and expanded internationally due to the solid fiscal and economic foundation prevailing as result of government support rather than interference. Internationally due to the nature of the industry, the fast food industry has been allowed to prosper likewise (Kelley, 2009). Economic Analysis The prevailing international financial instability constitutes the greatest challenge to not only the general business community, but also the fast food industry as the purchasing power of the consumers gets eroded. As most fast food products serve as snacks, the financial meltdown has slowed the growth in the industry. Although there are some signs of recovery, most analysts predict a slow year in terms of production sales in 2009 and 2010 forecasts (IMF, 2009b); (Yildiz, 2009); (White, 2005). The fast food industry has recently experienced slow growth in its core U.S. markets but has moreover continued to enjoyed sumptuous expansion in foreign markets. Conversely, MacDonald’s was nevertheless compelled to sell many of its Latin-American franchises due to poor results (Ritter, 2009). However the company’s innovative integration of local culture, food habits, and lifestyle that integrate both American and local elements has led to successful launching of new markets in hitherto virgin markets like the Middle East, China, Japan and Eastern Europe (Poggi, 2009); (Alkhereiji, 2003). Moreover, the fast food industry has fared much better than other foodstuff sectors where the impact of the international recession was widespread. A report by the restaurants review company Zagat for 2009 revealed that production revenues for the industry have maintained there stability with most of the major fast food establishments recording elevated sales. These include Wendy’s, MacDonald’s, Red Robin, and Starbucks which have confounded market estimates to enhance their year-to-year growth (Ritter, 2009). Internationally, the resilient developments in some markets have brought some equilibrium to the industry. The growth in various regions have stabilised the ambivalent domestic counters that are beset by both financial and health issues. The most viable entity among the emerging markets has undoubtedly being the Chinese market. The booming economic climate in China, Russia and the Middle East has seen the creation of new affluent modern middle class that is not hostile to ‘American culture’ of burgers and other snacks (IBIS-World-Industry-Reports, 2009); (RNCOS Report, 2008). Societal/Cultural Factors Analysis The fast food industry has evolved from their traditional domestic or American culture of drive-in restaurant to be exported first in Europe and later to the rest of the developed world and new to all the corners of the globe. However in its expansion, the industry has faced some negative reception particularly in Europe where health issues have persisted as the ingredients served have been accused of causing numerous medical problems. The ‘junk food’ has therefore being termed detrimental as it is too heavily packed with fatty, sugared, calorie rich ingredients that lead to obesity, diabetes, heart failures among other negative impacts (Croft, 2006). Healthy eating advocates have therefore greatly opposed the expansion and erection of the food stores within their vicinity. This trend propagated by health devotees is major challenge to the industry as an increasingly large number enrol in health clubs (Schlosser, 2001); Rubio-Sanchez, A. (2008); (Ritter, 2009). To counter the negative streams from the promoters of healthy foods, most fast food restaurant firms have in turn resorted to making their own fashion of healthy snacks that is acceptable to the public hence not heavily criticised by the healthy food movement. These include offering low fat, sugarless, and lower caloric packages. Among other measures that not only incorporate these social trends is the integration of their products to the local cuisines. In China, Middle East and Japan, the fast food firms have included local ingredients like sushi in Japan. In the Middle East, the industry has made provisions for the strict social-cultural arrangements by developing amicable separate structures that take consideration of sex, age and religion to be acceptable to the local communities (RNCOS Report, 2008). Among the restaurateurs, MacDonald’s has started a product aptly labeled McArabia that has integrated local products to the basic MacDonald’s ingredients to have a local flavour as it was launched in Dubai prior to other Arabian states. MacDonald’s restaurants have also been duly partitioned for both sexes in conformity with Islamic culture and teachings (Alkhereiji, 2003). Technology Analysis The fast food restaurants industry is majorly enjoined to technological advancements due to the nature of the highly innovative products that are constantly changing line with the market trends and rival actions. The restaurateurs therefore need very advanced apparatus or equipment to prepare the food stores hence making the operation very costly. The technological needs are not however confined to production equipment but must also encompass the promotion or advertisement (billboards, banners etc.) information (IT), and book-keeping tasks. The intense competition existing between the fast food restaurants companies necessities the use of advanced technology to develop better products than rivals. This has made the industry synonymous with innovation and technology as the need to develop fast cooking and fast served food is predominant to the restaurants and is clearly enhanced by technology (Menon, A. et al., 1999) Summary In this PEST (Political, Economic, Society, and Technology) analysis, the fast food restaurant business has been seen to have a good political environmental in almost all the territories it operates in. These factors enhancing the industry growth include excellent fiscal and financial conditions that have assisted the growth of the industry (Boulton, 1984). The current financial crisis has therefore not of been of much import to the fast food industry. In our PEST analysis the fast food industry has been shown to be heavily reliant on technological equipments and innovation in the production process du to the vicious rivalry amongst the firms. The industry has seen the development of innovative products that have evolved to incorporate the existing social-cultural norms in the host communities as have the decor. To gather a more rounded report on the internal and external factors driving the industry, the PEST analysis was found to be inadequate hence a more intensive examination was required. To study the fast food restaurant firms’ competitive advantages, Porters Five Forces template or model has being employed to garner the operating environmental for the fast food restaurants. Porters Five Forces (Competitive Environment Analysis) Porter’s five forces model created by M. E. Porter in 1979 has become the benchmark for detailing a firm current financial and market standing as regards its competitors within a specific industry. This model is analysis uses a market oriented approach to generate five forces that establish whether a market is conducive or beneficial to the existing producer or a market entrant (Porter, 1998). The five forces examine the micro-economic features that ascertain the appeal of a particular market segment hence shaping the decision of the firm. The analysis is categorised in terms of the market threats for: competitive rivalry, new entrants, substitute products, and bargaining power of consumers as to the propensity of being low, intermediate or high (Porter, 2004); (Strandskov, 2006); (Faulkner& Campbell, 2006). In our analysis we have profiled the fast food restaurant business to ascertain the market environment for the food chain business (See Appendix: Figure 2). Porters Five Forces Model regarding the fast food restaurant industry are thus analysed as follows: The Threat of Substitute Products The major threat confronting the fast food industry merchandise is the emergence of substitute health food products which are mostly sold by the supermarkets. The products pose a major challenge to the drive-in food products since offer a more acceptable level of comfort in the increasingly accepted medically approved alternatives (Obesity in America, 2008, pg.2). The traditional mainstay products in the food restaurant business have been condemned for spreading the health problems occasioned by obesity and unhealthy eating. The other substitute products retailed at the supermarkets are the frozen food products which are usually easily cooked, easily accessed and inexpensive hence constituting a viable threat to the fast food products (Levinstein, 2003). Despite the existence of these substitute products including alternative low fat healthy products or the iced up foods sold in the supermarkets, their threat is not direct because the particular products are not as established as the fast food restaurant business. These threats are lethargic due to the market presence of the fast food industry as opposed to the supermarket alternatives and hence have a low threat. Threat of New Entrants The fundamental factors facing a new market entrant and which are deemed as barriers encompass: product features, economies of scale and asset fundamentals to set up the business (Pitss & Lei, 2003). The big hypermarket networks offer the biggest threat to the dominance of the fast food restaurant in the readily prepared food sectors. (Schlosser, 2001) The threat of new entrants is intermediate due to the deterrent nature of heavy expense required to make a market presence in the sector. Heavy expenditure is likely to prevent new firms venturing into the market including equipment, advertising, personnel etc. Bargaining Power of Suppliers: The fast food industry is dependent on the supply of fresh produce and other accessories from contracted suppliers. The prevailing elevated commodity prices compounded by the incessant price wars amongst competing companies signify that the fast food industry revenue is vastly eroded by the hefty expenses ensuing (Figure 4 and 5). The provision of the commodities required in the production process is thus basically influenced by the contractors hence are able to have a larger say in the prices. The fluctuating food commodity costs always have a detrimental effect on the industry due the significance of elevated wholesale prices which have been on an upward trend since 2007 increasing by 8.5 percent in 2008 (Restaurant.org, 2009); (Kelley, 2009). From this analysis, we can discern that the threat from suppliers is quite high due the fast food restaurants having minimal control on the supply line dictated by the suppliers. Bargaining Power of Customers: The prevalent international financial meltdown has revealed the fickle nature of consumer spending as many commercial sectors suffer heavy losses while others have being forced into bankruptcy. This phenomenon has not spared the fast food restaurant business though in a subsidised way. Since most of the consumer expenditure at the fast food restaurants is constituted as snacks, the industry has been minimally affected however the shift from the full restaurant has minimised the severe effects as more people troop to the drive-in windows of the fast food restaurants (IMF, 2009b); (Kelley, 2009); (Ritter, 2009). The bargaining power of the consumer is relatively high as the supply increases and other alternative like health food products and frozen food substitutes exist thus diluting the demand. The bargaining power of the customers consequently constitutes an elevated threat. Competitive Rivalry within the Industry Premeditated brand positioning is essential for companies to evolve a unique lasting development and prosperity thus brand knowledge and robust links bearing the trade name ensures durable execution (Gladden & McDonald, 1999). The fast food restaurant industry is heavily competitive as various price wars rage amongst the main rivals. This intense competition has been dubbed as injurious and eats on the companies earnings as price undercutting force down values as the rivals grapple over market niches. Most of the big companies including, McDonalds, Burger King, Yum! Brands, Wendy’s have developed some well established system chartered franchises that vie with each other internationally (Menon, A. et al., 1999); (Pitts and Lei, 2003). The fast food industry is thus intensively territorial and consequently slowing down development for both the market entrants and the large firms in the market who are forced to divert their profits to the incessant market wars. Porters Five Forces paradigm analysis as applied to the fast food restaurant business indicates the prevalence of major problems in the industry which were not apparent in the PEST analysis. Amongst this, the threat from substitute products has been detected but can be termed as pedestrian to the industry. Nevertheless the bargaining power of the suppliers and those posed by the consumers, plus the fierce rivalry prevailing in amongst the big firms indicate that the fast food restaurant business is besieged by pressure from within and externally from the various stakeholders in the industry. Stiff competition has cutback on profits as the companies engage each other over market turfs. However overall the industry has maintained healthy economic environment as it enjoys more advantages than disadvantages for the well established firms. This has been exemplified by its ability to withstand completion from substitute products and the continued robust earnings despite the prevailing international financial crisis. SWOT ANALYSIS A Swot analysis is a popular strategy employed by firms to appraise their current internal and external features that give an indication of its affirmative and undesirable elements that can help in realizing its objectives. SWOT (Strengths, Weaknesses, Opportunities, and Threats) is the benchmark for many firms wishing to take stock of their current position while assessing future prospects. Consequently strengths and weaknesses have been seen as the internal factors whereas opportunities and threats are regarded as external factors (Hill & Westbrook, 1997); (Faulkner & Campbell, 2006). In our application of SWOT on the fast food industry, we have selected the second largest firm in the industry, Burger King (NYSE: BKC). This is a predominant international fast food restaurateur which is predominantly found in North America. It operates second largest global fast-food network made up of mostly franchised restaurants, auxiliaries and franchises employing more than 41,000 employees by June, 2008 spread in 71 countries internationally in more than 11,550 restaurants (Dividend Growth Investor, 2009). STRENGTHS Burger King enjoys a strong brand name globally not only among the fast food restaurants but also a grouping of all categories. Burger King has minimal capital spread relying mostly on its franchised contracts for revenue hence not overly extended financially Burger King as a market leader lends it a large revenue base hence enabling the firm easily diversifies its products giving it a strong competitive position. Burger King has a well trained human resource that continuously generates innovative and novel business ideas which ensure its market leadership and sustenance. WEAKNESSES Burger King is not as well diversified as its main rival McDonalds, with most of its network locked within the United States (66 percent) that has minimal international presence (Hoover Fast Food Report, 2008); DATA-WAREHOUSE. (2003). Burger King relies extensively on its franchises has not fully in control of its business (BKC, 2008). Has been plagued by numerous lawsuits involving authorities and human rights groups over either, nutritional compliance laws, animal rights rules including People for the Ethical Treatment of Animals (PETA), and labour issues with staff (Gale Group, 2008). OPPORTUNITIES Burger King can introduce low priced products that will compete with the rivals e.g. Wendy’s one price strategy. Burger King is able to generate more funds from expanding more internationally rather than relying on its core North American base. Burger King (NYSE: BKC) stock price position as depicted by its high dividend policy continues to attract many takers at the New York Stock Exchange (NYSE) as well as other counters traded in. Burger King can aggressively market itself in the stable emerging markets of China, India, and the Middle East that have continued to enjoy hefty growth patterns (Martin, 2008). The global financial crisis has impacted negatively on domestic budgets hence more people are being squeezed out of the full restaurants to patronise the small drive-in fast food restaurants. THREATS The fierce bitter competition prevailing amongst the fast food restaurant players has continued to wreck havoc on their earnings as the price wars erode their profits. The introduction of healthy food segment has made many habitual consumers of fast food products abandon them in favour of substitute products (Adams, 2007). The litigious nature of American citizens has spotlighted Burger King as former employees target the firm to attain retribution for various acts of omission. These lawsuits compounded by other compliance issues facing the firm made the company continue to be grounded on undue issues (Schlosser, 2001). The introduction of restaurants that rival the fast food chains in terms of faster service has now resulted in greater competition in the industry. These restaurants named fast casuals are increasingly becoming popular as they offer the benefits of fast service and easy sitting arrangements (Chipotle, Cosi and Panera). Limitations of a PEST Analysis A PEST analysis mainly examines the macro-economic factors that affects a firm or industry’s environment but largely ignores the micro-economic issues that are crucial to the business. Our analysis has therefore not included the internal mechanisms that affect the fast food industry like market dynamisms, threat from competitors, substitute products outlays among others. The PEST analysis also ignores financial factors including capital outlay as well as human resources factors. A PEST analysis requires to be done in conjunction with another more micro-economic outlook like a GAP analysis, Porter’s Five Forces study or SWOT analysis hence incorporating a more thorough or more inclusive investigation of the firm or industry (Marketingintelligence.com, 2002). According to Netmba.com (2003), a PEST analysis lacks the capacity to project comprehensively future forecasts for a firm entering an industry without using other analytical business tools. A PEST or PESTLE analysis basically looks at the macro economic factors while ignoring the microeconomic issues hence rendering it ineffective especially when dealing with firms or industries covering multiple regions internationally or across borders that have differing political, social-cultural and economic factors in the diverse regions. The expenses computed underestimate the potency of ‘risk, growth, profit or VAT’ (Henry, 2008, pg.3). From our analysis we can discern that the fast food industry is well endowed with profitable firms who have managed to spread globally using various market strategies including franchise contracts. The PEST analysis, Porters Five forces method and the SWOT analysis have revealed that though the industry has been challenged by the proliferation of new ‘health’ products and the global economic recession, they are were set to overcome them. The PEST analysis revealed that the industry enjoys considerable macro-economic advantages with minimal political, social and economic hindrances either domestically or internationally. References Adams, Catherine (2007) Reframing the Obesity Debate: McDonald’s Role May Surprise You Journal of Law, Medicine, and Ethics 35: pp.154-15. Academic Search Premier University of Nevada, Reno Libraries Aguiar, J. R. (2004). Consumer Change in Fast Food Preference. London: Business in the Contemporary World. Alkhereiji, Mohammed (2003) McDonald’s Launches McArabia Arab News Staff, March 5, 2003. Armstrong, J. Scott. (1982). The Value of Formal Planning for Strategic Decisions, Strategic Management Journal 3: 197–211. Arnold, G., 2002. 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